Chicago Truck Drivers, Helpers & Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics, Inc. , 698 F.3d 346 ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-3034
C HICAGO T RUCK D RIVERS, H ELPERS AND
W AREHOUSE W ORKERS U NION (INDEPENDENT)
P ENSION F UND, and JACK S TEWART, Trustee,
Plaintiffs-Appellants,
v.
CPC L OGISTICS, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 10 C 2314—James B. Zagel, Judge.
A RGUED A PRIL 3, 2012—D ECIDED A UGUST 20, 2012
Before B AUER, P OSNER, and K ANNE, Circuit Judges.
P OSNER, Circuit Judge. This appeal from a decision
upholding an arbitrator’s award is about what happens
when an employer withdraws from a multiemployer
defined-benefits pension plan, as the appellee, CPC, did
in 2005.
2 No. 11-3034
Multiemployer pension plans—which are governed, as
single-employer plans are, by ERISA—are created by
collective bargaining agreements to provide benefits to
employees of many different firms. Thus they are found
in industries such as construction and trucking in
which workers do short-term, seasonal, or irregular work
for many different employers over their working lives.
29 U.S.C. § 1002(37)(A); John H. Langbein et al., Pension
and Employee Benefit Law 70-75 (5th ed. 2010). When an
employer withdraws from such a plan, the plan
remains liable to the employees who have vested pension
rights, though it no longer can look to the employer
to contribute additional funds to cover these obligations.
In an effort to prevent withdrawals that will shift the
burden of funding the pension plan to the remaining
employers and by doing so may precipitate additional
withdrawals, provisions added to ERISA by the Multi-
employer Pension Plan Amendments Act of 1980, 29 U.S.C.
§§ 1381-1461, assess the employer with an exit price
equal to its pro rata share of the pension plan’s funding
shortfall. The shortfall (“unfunded vested benefits”) is
the difference between the present value of the pension
fund’s assets and the present value of its future obliga-
tions to employees covered by the pension plan. 29 U.S.C.
§§ 1381, 1391. (If the present value of the assets exceeds
the present value of the plan’s future obligations, there
is no shortfall.)
Estimation of the shortfall depends critically on esti-
mating the amount by which the fund’s current assets
can be expected to grow by the miracle of compound
No. 11-3034 3
interest. The higher the estimated rate of growth, the
less the employers must put into the fund today to cover
the future entitlements of the plan’s participants and
beneficiaries. “[F]or a typical plan, a change (upward or
downward) of 1 percent in the interest assumption (e.g.
an increase from 6 to 7 percent) alters the long-run cost
estimate by about 25 percent.” Dan M. McGill et al.,
Fundamentals of Private Pensions 612 (8th ed. 2005); see
also Artistic Carton v. Paper Industry Union-Management
Pension Fund, 971 F.2d 1346, 1348 (7th Cir. 1992).
In addition to estimating the size of the plan’s funding
shortfall, the pension plan must apportion responsibility
for the shortfall among the employers participating in
the plan. Each employer must pay his share to the fund
if and when he withdraws, so that the plan can pay the
employer’s share of the plan’s unfunded vested benefits
as those benefits come due in the future. An employer
who has just joined the plan may worry about inheriting
withdrawal liability because the existing members failed
to fund the plan adequately in prior years. To alleviate
this worry, ERISA creates default rules (that is, rules
that govern unless the plan provides otherwise) for
assigning each participating employer a share of only
so much of the plan’s funding shortfall as occurred
while the employer was participating in the plan. 29 U.S.C.
§§ 1391(b)(2)-(4); 29 C.F.R. § 4211.32; CenTra, Inc. v. Central
States, Southeast & Southwest Areas Pension Fund, 578
F.3d 592, 599-600 and n. 7 (7th Cir. 2009); Israel Goldowitz
& Ralph L. Landy, “Special Rules for Multiemployer
Plans,” in ERISA Litigation 1292-95 (Jayne E. Zanglein et al.
eds., 4th ed. 2011). The plan in this case used these rules
4 No. 11-3034
to calculate the pro rata share of the funding shortfall to
be borne by the withdrawing employer, appellee CPC.
The rules calculate withdrawal liability in steps. The
first is to determine annual “pools” of liability, each
representing the change (which might be an increase or
a decrease) in the plan’s total funding shortfall from one
year to the next. The previous pools (that is, the previous
annual changes in unfunded vested benefits) are then
discounted by 5 percent a year (so, for example, a pool
from seven years earlier would be discounted by 35
percent). As a result, after 20 years a pool no longer
affects withdrawal liability. The rationale for dis-
counting is that with the passage of years, funded benefits
are more likely to have been paid and so no longer be
owing.
Next, each discounted pool is apportioned among the
employers participating in the plan on the basis of their
contributions to the pension fund in the pool year
and the four years preceding. The five-year window
measures the size of an employer’s contributions to the
fund relative to the other employers in the short term,
on the theory, related to the 20-year discounting, that
recent experience has greater predictive significance.
The window is five years rather than just one in order
to smooth trends in contribution, so that a year of anoma-
lous contributions doesn’t drastically alter the alloca-
tion shares among employers. (Thus an employer who
contributed a lot in 2004 but almost nothing from 2000
to 2003 would not be assessed a large chunk of the
2004 liability pool—the brief spike would be smoothed by
No. 11-3034 5
the inclusion of the preceding years.) An employer’s
withdrawal liability is the sum of his fractional share,
calculated on the basis of his last five years’ contribu-
tions, of the 20 pools.
The table below presents a slightly simplified version
of how CPC’s withdrawal liability was determined. The
annual pool is calculated first. (Notice that for years in
which the plan’s funding shortfall decreased—for example,
1985-1986 and 1995-1998—the pools are negative. Each
employer’s share of negative pools reduces his with-
drawal liability.) The pools are discounted at 5 percent
per year. The discounted pools are then divided among
the employers on the basis of their relative contributions
in the pool year and the four prior years (CPC made
3.67 percent of all contributions to the fund from 2000 to
2004 and 1.42 percent of all contributions from 1985 to
1989.) Its withdrawal liability (exit price) was thus the
sum of its shares of each of the discounted pools from
1985 to 2004.
6 No. 11-3034
100%
Minus CPC’s
Dis- Dis- Relative CPC’s
count counted Contribu- Share of
Year Pool Rate Pool tion Each Pool
2004 $56,171,305 x 100% = $56,171,305 x 3.67% = $2,061,487
2003 $39,092,526 x 95% = $37,137,900 x 2.75% = $1,021,292
2002 $8,587,297 x 90% = $7,728,567 x 1.65% = $127,521
2001 $7,960,547 x 85% = $6,766,465 x 1.44% = $97,437
2000 $2,768,374 x 80% = $2,214,699 x 1.26% = $27,905
1999 $6,044,832 x 75% = $4,533,624 x 1.28% = $58,030
1998 -$14,106,445 x 70% = -$9,874,512 x 1.06% = -$104,670
1997 -$2,854,709 x 65% = -$1,855,561 x 0.82% = -$15,216
1996 -$3,878,390 x 60% = -$2,327,034 x 0.56% = -$13,031
1995 -$7,226,847 x 55% = -$3,974,766 x 0.49% = -$19,476
1994 $13,469,192 x 50% = $6,734,596 x 0.46% = $30,979
1993 $9,433,992 x 45% = $4,245,296 x 0.59% = $25,047
1992 $3,155,707 x 40% = $1,262,283 x 0.78% = $9,846
1991 $6,080,864 x 35% = $2,128,302 x 1.04% = $22,134
1990 $2,031,775 x 30% = $609,533 x 1.23% = $7,497
1989 $7,118,643 x 25% = $1,779,661 x 1.42% = $25,271
1988 $9,804,517 x 20% = $1,960,903 x 1.59% = $31,178
1987 $22,647,445 x 15% = $3,397,117 x 1.66% = $56,392
1986 -$13,247,195 x 10% = -1,324,720 x 1.61% = -$21,328
1985 -$381,233 x 5% = -$19,062 x 1.49% = -$284
CPC’s Withdrawal Liability: $3,428,013
Disputes over withdrawal liability are resolved by
arbitration, 29 U.S.C. § 1401(a)(1); Chicago Truck Drivers v.
No. 11-3034 7
El Paso CGP Co., 525 F.3d 591, 595 (7th Cir. 2008), subject
however to judicial review similar in scope to appellate
review of district court decisions. Central States, Southeast
& Southwest Areas Pension Fund v. Midwest Motor Express,
Inc., 181 F.3d 799, 804-05 (7th Cir. 1999); Board of Trustees,
Sheet Metal Workers National Pension Fund v. BES Services,
Inc., 469 F.3d 369, 375 (4th Cir. 2006). The arbitrator in
the present case ruled that the pension plan’s trustees
had overassessed CPC’s withdrawal liability by $1,093,000
(almost a third of its total assessment—the $3.4 million
figure in the table). The district judge upheld the arbitra-
tor’s ruling, and the plan and one of its trustees (but
we can ignore him) appeal.
Appellate review of the district court’s decision is
plenary, in the sense that the court of appeals like the
district court is reviewing the arbitrator’s decision, see
CenTra, Inc. v. Central States, Southeast & Southwest Areas
Pension Fund, supra, 578 F.3d at 602; Joseph Schlitz Brewing
Co. v. Milwaukee Brewery Workers’ Pension Plan, 3 F.3d 994,
1000 (7th Cir. 1993), affirmed, 513 U.S. 414 (1995); Central
States, Southeast & Southwest Areas Health & Welfare Fund
v. Cullum Cos., 973 F.2d 1333, 1335 (7th Cir. 1992), and
thus not deferring to the district court’s ruling. This is
the same pattern that is observed when a court of
appeals reviews a decision by a district court to which
an administrative law judge’s decision denying social
security disability benefits has been appealed. McKinzey
v. Astrue, 641 F.3d 884, 889 (7th Cir. 2011); O’Connor-
Spinner v. Astrue, 627 F.3d 614, 618 (7th Cir. 2010). It is
the arbitrator’s decision, like the administrative law
8 No. 11-3034
judge’s, that receives judicial deference, from both the
district court and the court of appeals.
Hideous complexities lurk in the briefs in this appeal.
Many appellate lawyers write briefs and make oral ar-
guments that assume that judges are knowledgeable
about every field of law, however specialized. The as-
sumption is incorrect. Federal judges are generalists.
Individual judges often have specialized knowledge of a
few fields of law, most commonly criminal law and
sentencing, civil and criminal procedure, and federal
jurisdiction, because these fields generate issues that
frequently recur, but sometimes of other fields as well
depending on the judge’s career before he became a
judge or on special interests developed by him since.
But the appellate advocate must not count on appellate
judges’ being intimate with his particular legal nook—with
its special jargon, its analytical intricacies, its com-
mercial setting, its mysteries. It’s difficult for specialists
to write other than in jargon, and when they don’t realize
the difficulty this poses for generalist judges neither
do they realize the need to write differently.
Federal pension law is a highly specialized field that
judges encounter only intermittently. Yet the lawyers
in this case made no allowance for our lacking their
specialized knowledge. Consider this extract from the
statement of facts in the appellant’s opening brief (record
citations and footnotes omitted):
Most multiemployer pension plans retain one
plan actuary, and ask it to provide calculations for
two purposes: (1) calculations which ERISA and the
No. 11-3034 9
Internal Revenue Code (the “Code”) require the
actuary to certify on Schedule B to the plan’s annual
report; and (2) calculations the plan can use as
the foundation for determ ining withdrawal
liability . . . . The Fund’s actuary, the Segal Company
(“Segal”), . . . calculated UVB for withdrawal liability
purposes using a series of steps rather than simply
using the UVB from its Schedule B report. Segal’s
approach, known as the “Segal Blend,” is to
combine the interest rate from its Schedule B
funding report with the average interest rates then
current for annuities. Over the years Segal thus pro-
vided the Fund with one UVB for funding and
another for withdrawal liability.
In 1993 . . . the Supreme Court issued a decision
that prompted Segal to issue a guidance memorandum
to its actuaries dated March 29, 1994. The memoran-
dum advised Segal actuaries that the Court’s decision
in Concrete Pipe and Prods. v. Construction Laborers
Pension Trust, 508 U.S. 602 (1993), raised the question
whether it was permissible for an actuary to have
different numbers for the UVB in the withdrawal
liability report and the Schedule B report. The memo-
randum suggested that client plan trustees be asked
to make a decision telling Segal what to do and at-
tached templates for memoranda to be provided to
client trustees and plan counsel and a “Questions
and Answers” section for actuaries to use in ad-
vising their clients on the decision. The gist of the
templates was to advise client plans that Segal’s use
of different assumptions in the two reports may
10 No. 11-3034
create litigation risk for the clients. Two solutions
were proposed for consideration. First, the trustees
could direct Segal to continue to use the Segal
Blend approach for withdrawal liability, which
would continue to produce two different numbers
for the plan’s unfunded vested benefits each year,
one for the funding report and one for the with-
drawal liability report. Second, the trustees could
direct Segal to modify the steps used to determine
the UVB for withdrawal liability: first calculate the
UVB using the Blend assumptions, and then deter-
mine the UVB using the funding assumptions, with
the latter setting an upper limit for the UVB. Using
the lower number for the UVB each year, Segal rea-
soned, would eliminate the risk that an employer
would complain that the UVB was too high . . . .
[The trustees chose the latter option, passing a
resolution] that the UVB would continue to be deter-
mined based upon the Segal Blend (“best estimate”)
approach, subject to the directive that the UVB not
be higher than the UVB reported by Segal to the
IRS in Schedule B for that year.
As it happened, CPC’s withdrawal liability assess-
ment was significantly impacted by two factors.
First, in 2004 the Fund repealed the 1997 resolution
adopting the “cap” on the Segal Blend method, re-
turning to always using the Segal Blend to deter-
mine UVB, resulting in the recapture of unfunded
vested benefit liabilities of the Fund not previously
recognized due to the operation of the cap. At
No. 11-3034 11
precisely the same time, CPC’s share of the Fund’s
total contribution base increased dramatically, from
1.26% in 2000 to 3.67% in 2004. The combination of
these two factors served to create significantly
higher liability for CPC than if it had happened
to withdraw in a different year . . . .
Here is a parallel discussion in the appellee’s brief (again
we omit record citations and footnotes):
In a memorandum dated Wednesday, April 4, 1997,
the Client Relationship Manager from the Segal Com-
pany to the Fund. . .discussed the Supreme Court’s
1993 decision in Concrete Pipe and Product of California
Inc. v. Construction Laborers Pension Trust for Southern
California, 508 U.S. 602 (1993). The memorandum
advised that the Segal Blend remained the actuary’s
best estimate for the interest assumption to be used
in the calculation of the Fund’s UVBs for withdrawal
liability purposes, and suggested that the Fund
consult with legal counsel on the impact of the con-
tinued use of the Segal Blend. . . . [The manager testi-
fied] that the memorandum provided the trustees
“with an option to cap the unfunded liability.” . . . .
As a result . . . the trustees required the actuary
to apply a “cap” to the UVBs used to calculate the
withdrawal liability pools from 1996 until 2004. As
indicated in Segal’s withdrawal liability reports
during the years that the cap applied, the cap limited
UVBs “to be no greater than the vested liability cal-
culated using the same investment return used for
funding less the actuarial value of assets.” Thus, the
12 No. 11-3034
funding interest assumption was used to calculate
the UVBs that were the basis [of] the pool in all years
when it produced lower UVBs than the Segal Blend
interest assumption . . . .
Evidence at the arbitration hearing confirmed
that the trustees capped UVBs for the deliberate
purpose of lowering withdrawal liability in order to
attract employers to the Fund. Segal Chief Actuary
Thomas Levy testified Segal came up with the
Concrete Pipe option in 1996 because employers had
come to Segal with concerns that “changing economic
circumstances” would “severely adversely affect the
willingness” of employers to support their plans,
because it resulted in higher withdrawal liability
assessments . . . . [Plan] Trustee William Carpenter
conceded that the reason for adopting the cap was
to lower withdrawal liability due to concerns at the
time that higher withdrawal liability would put off
employers and prospective employers who might
come into the Fund.
The trustee’s cap was removed in the 2004 with-
drawal liability report . . . . [T]he trustees decided to
remove the cap in order to raise withdrawal liability
for departing employers and enhance the viability
of the Fund at a time when the Fund was experiencing
declining assets and declining membership.
The selective decisions to cap and then uncap the
UVBs had a significant impact on CPC’s assessed
withdrawal liability. When the trustees uncapped
UVBs in 2004, the UVBs nearly doubled from
No. 11-3034 13
$67 million in 2003 to $117 million in 2004. Without
the cap, portions of this increase in the UVBs would
have been included in several of the earlier pools
(and would have been subject to the statutory 5% per
year reduction). Also significantly for CPC, much of
the change attributed to 2004 would have been allo-
cated to prior years when CPC’s relative percentage
of contributions was lower. Employers, such as CPC,
who had a larger percentage of the 2004 pool than
they had during previous years, were disproportion-
ately affected by the 2004 pool. Specifically, the con-
comitant result of the cap on the interest assumption
in prior years and subsequent removal of the cap
in 2004 was that the “sum allocable” to CPC for the
2004 pool was $2.075 million, compared to $1.45
million for all of the 19 previous pools combined.
Because CPC was a larger contributor to the Fund
in 2004 than it had been in prior years, if the trustees
had used Segal’s best estimate assumptions for all
years, CPC’s allocable share of the 2004 pool would
have been only $353,452, resulting in a reduction of
$1.093 million in CPC’s overall assessment.
All this was terribly opaque to us because the parties
failed to provide context—failed to explain what exactly
the pools are, why interest rates are important to with-
drawal liability, what the “funding interest assumption”
is, and why what they confusingly call a “cap” on the
Segal Blended Rate (confusingly because in most years
the “cap” required as we’ll see the substitution of a
higher rate than the Blended Rate) caused a loss to CPC
when the “cap” was removed.
14 No. 11-3034
And so at the oral argument one of the judges felt
compelled to ask one of the lawyers, pleadingly, whether
she could explain in words of one syllable what the
case was about. She was a good lawyer and tried, but,
perhaps surprised by the question, failed.
We have had to fall back on a remark by Justice Holmes:
“I long have said there is no such thing as a hard case. I am
frightened weekly but always when you walk up to the
lion and lay hold the hide comes off and the same old
donkey of a question of law is underneath.” Holmes-Pollock
Letters: The Correspondence of Mr. Justice Holmes and
Sir Frederick Pollock, 1874-1932, vol. 1, p. 156 (Mark De
Wolfe Howe ed. 1941) (letter to Pollock of Dec. 11, 1909).
We have applied ourselves to tugging the hide off this
lion in search of the donkey underneath. We think we
have found the donkey.
We said earlier that estimating the interest rate at
which the pension fund’s assets are likely to grow is
required for determining withdrawal liability. Consider
a plan that has $1 million in assets and expects to have a
$5 million benefit obligation 20 years from now. If its
assets are assumed to grow over this period at an
annual rate of 6 percent, its funding shortfall—the differ-
ence, discounted to present value, between the $5 million
it will owe and the assets it will have as a result of the
compounding of the 6 percent interest—will be $505,971. If
the plan’s assets and benefit obligation are unchanged at
year’s end, its funding shortfall will have grown to
$599,099, the increase being attributable to the fact that
the benefit will be one year closer to falling due. The
No. 11-3034 15
plan’s withdrawal liability pool will thus be $93,124, the
amount by which the funding shortfall increased. If an
8 percent interest rate were assumed instead, the initial
shortfall would be only $9,482, increasing to $93,559 at
year’s end, creating a withdrawal liability pool of $84,076.
Estimating the growth of the fund’s assets is required
not only for determining withdrawal liability but also
for determining whether employers are contributing to
the fund the minimum amount required by ERISA in
order to reduce the probability that the Pension Benefit
Guaranty Corporation may have to make up for the
fund’s not being able to pay vested benefits; for the
Corporation is the insurer of those benefits, though only
to a limited extent. (In fact, the Corporation has been
helping the fund in this case remain solvent. See “PBGC
Divides Chicago Trucker Pension Plan to Extend its
Solvency,” May 26, 2010, www.pbgc.gov/news/press/
releases/pr10-35.html (visited Aug. 3, 2012).) Employers
must pay a penalty in the form of a tax if they fail to
contribute the required minimum amount. 26 U.S.C. § 412,
§§ 4971(a)(2), (b)(2); Langbein et al., supra, at 220-35.
The plan in our case retained a prominent pension
benefits actuarial firm—the Segal Company—to
determine whether the plan met its minimum funding
requirements for avoiding the tax penalty and also
what the withdrawal liability of each of its participating
employers would be if one or more of them withdrew
from the plan in the coming year. Both funding calcula-
tions depended critically on the interest rate used to
estimate the plan’s ability to meet its future obligations.
16 No. 11-3034
During the period relevant to this case, ERISA required
the plan actuary, in calculating interest rates as in
making other actuarial determinations (such as how the
plan’s liabilities would grow in the future, which will
depend on the rate at which employees with vested
benefits retire and die as well as on the rate at which
future employees will work long enough for their
benefits to vest), to use assumptions which, “in the ag-
gregate, are reasonable” and “which, in combination,
offer the actuary’s best estimate of anticipated ex-
perience under the plan.” These requirements apply to
determining both adequacy of funding to avoid the tax
penalty, 26 U.S.C. § 412(c)(3)(A)(ii), (B) (revised by the
Pension Protection Act of 2006 in respects not material
to this case), and withdrawal liability. 29 U.S.C.
§ 1393(a)(1).
Despite the identical statutory text (the text we just
quoted) for both calculations, the Segal Company used
different formulas to arrive at its “best estimate” of the
two rates. It called its best estimate of the interest rate
for tax purposes the “funding interest assumption”
and for withdrawal-liability purposes the “Segal Blended
Rate.” We’ll call the funding interest assumption the
“Funding Rate.”
The different methods yielded different interest rates.
The Blended Rate was based in part on current rates for
annuities (and in part on the Funding Rate—hence
“blended”). These rates were shorter-term and more
variable than rates used for the Funding Rate because
they were used to calculate the employer’s liability at
No. 11-3034 17
a specific time (namely the coming year). What might
happen in later years to affect the fund’s assets and
liabilities—critical considerations in determ ining
whether the pension plan was sufficiently funded to
avoid the penalty tax—was irrelevant.
If the short-term rates used in calculating the Blended
Rate exceeded the long-term interest rates used to calculate
the Funding Rate, making the Segal Blended Rate higher
than the Funding Rate, the effect would be to reduce
withdrawal liability, because the higher the assumed
interest rate in calculating withdrawal liability the faster
the funds’ assets would be estimated to grow and so the
lower its future liabilities would be projected to be. When
developed (in the 1980s, shortly after the Multiemployer
Pension Plan Amendments Act was passed), an era gen-
erally of high interest rates, the Segal Blended Rate
usually did generate a higher interest-rate estimate than
the Funding Rate, making the estimate of the plan’s
shortfall smaller for withdrawal-liability purposes than
for penalty-tax purposes. Minimizing withdrawal
liability was attractive for Segal’s multiemployer-plan
clients because it made it easier for them to induce em-
ployers to join such a plan—easier because they could ex-
pect to be charged a lower exit price if they later withdrew.
But the two rates had reversed by the mid-1990s. The
Segal Blended Rate was now lower than the Funding
Rate, resulting in higher withdrawal-liability estimates
than if the Funding Rate had been used. Remember that
the lower the interest rate used to calculate the future
growth of fund assets, the lower the estimate of what
18 No. 11-3034
those assets will be worth in the future, just as the slower
a child grows each year, the shorter he will be as an adult.
In 1997 Segal told the pension plan’s trustees that they
could if they wanted direct Segal to ignore the Segal
Blended Rate and instead use the Funding Rate—which
now as we said exceeded the Segal Blended Rate—to
calculate withdrawal liability. Segal didn’t say the
Funding Rate was as good an estimate as Segal’s own “best
estimate” for withdrawal-liability purposes; it stuck to
its best estimate; it just said that the pension plan
could choose between the two rates in calculating em-
ployers’ withdrawal liability. Language in the Supreme
Court’s decision in Concrete Pipe & Products of California,
Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 632-
33 (1993), could be read to suggest that having two dif-
ferent interest-rate assumptions—one for withdrawal
liability and one for avoiding the tax penalty—might
make a plan vulnerable to claims that either or both
were “unreasonable” within the meaning of 29 U.S.C.
§ 1393(a)(1). The danger was remote; the Court had
indicated that “supplemental” assumptions that might
cause the rates to diverge were permissible. 508 U.S. at
633. Nevertheless Segal was worried, and at its sug-
gestion the plan’s trustees directed Segal to calculate
both the Segal Blended Rate and the Funding Rate and
then use the higher of the two (which remember would
generate a lower withdrawal liability) each year. The
Funding Rate was higher in every year from 1996 to
2004 except 2000 when the Segal Blended Rate was
higher and hence was used by the plan instead.
No. 11-3034 19
The trustees’ decision was questionable. ERISA
requires that the computation of withdrawal liability be
based on “the actuary’s best estimate of anticipated ex-
perience.” 29 U.S.C. § 1393(a)(1) (emphasis added); cf.
Citrus Valley Estates, Inc. v. Commissioner, 49 F.3d 1410, 1414
(9th Cir. 1995); Rhoades, McKee & Boer v. United States,
43 F.3d 1071, 1075 (6th Cir. 1995); Wachtell, Lipton, Rosen
& Katz v. Commissioner, 26 F.3d 291, 296 (2d Cir. 1994). The
actuary is a professional, assumed to be neutral and
disinterested; a plan’s trustees, in contrast, may, whether
for short-term reasons, pressures from employers or
unions, or lack of relevant expertise, want unreasonably
high or unreasonably low interest-rate assumptions,
contrary to 29 U.S.C. § 1393(a)(1). On the one hand, the
higher the interest rate assumed, the faster the fund will
be predicted to grow and so the smaller will be the
liability of withdrawing employers; this in turn may
encourage employers to join the plan. On the other
hand, the lower the interest rate assumed, the greater
the funding shortfall, enabling the plan to impose
greater withdrawal liability on any withdrawing em-
ployer. That will discourage withdrawals, and also allevi-
ate current funding shortfalls by replenishing the fund
with large withdrawal payments by those employers who
do withdraw.
In 2004 the plan’s trustees directed the Segal Company
to revert to using the Segal Blended Rate to
calculate the plan’s unfunded vested benefit pools for
withdrawal-liability purposes. That rate was lower than
the Funding Rate (as it had been in every year since
1996 except 2000), but the plan’s priorities apparently
20 No. 11-3034
had changed, from attracting more employers with the
prospect of low withdrawal liability (by assuming a
high interest rate and therefore a rapid growth in the
fund’s assets) to extracting higher exit prices from em-
ployers who withdrew (by assuming a low interest rate
and in consequence a sluggish rate of asset growth and
so a larger shortfall.).
The reversion to the Segal Blended Rate in 2004 was a
major factor in causing the plan’s unfunded vested
benefits to leap from $67 million to $117.2 million that
year. It was the plan’s use of the higher Funding Rate
from 1996 to 2003, coupled with the reversion to the
lower Segal Blended Rate thereafter, that increased CPC’s
withdrawal liability by $1,093,000 from the amount
it would have owed had the Segal Blended Rate been
used throughout the period.
For CPC had been hit by a one-two punch. The higher
rate in 1996-2003 had, by shrinking the pools and thus
withdrawal liability, induced a number of employers to
withdraw, so that in 2004 CPC found itself allocated a
higher share of the 2004 pool. The change in interest-
rate assumptions particularly distorted the 1996 and
2004 pools because the funding shortfalls calculated at
the beginning and end of those years were based on
different interest rates. Since the withdrawal liability
pool is the growth of the funding shortfall, a mid-year
change in the assumptions can have a dramatic effect
even if the plan’s financial performance is unchanged.
Recall how in our earlier example the constant use of an
8 percent interest rate generated a withdrawal liability
No. 11-3034 21
pool of $84,076, while use of a 6 percent rate generated
a pool of $93,124. If that hypothetical plan calculated its
initial funding shortfall using an 8 percent interest rate
and switched to a 6 percent interest rate for its year-
end calculation, its withdrawal liability pool would
balloon to $589,617.
Had CPC withdrawn from the plan before 2004, it
would have benefited from the fact that the pools had
shrunk in those years, when the Funding Rate had (in
all but 2000) been used in place of the Segal Blended
Rate, since it would have paid less in withdrawal
liability upon leaving the fund. But it had stuck around,
and the earlier shrinkage had caused the 2004 pool to
soar in size in order to compensate. Foisting a larger
share of the larger 2004 pool on CPC increased the com-
pany’s withdrawal liability still further.
ERISA requires the plan’s trustees to base its calcula-
tion of withdrawal liability on the actuary’s “best esti-
mate.” 29 U.S.C. § 1393(a)(1). Segal maintains, and the
plan does not dispute, that the Segal Blended Rate, not
the Funding Rate, was its best estimate of the right
interest rate to use to calculate withdrawal liability. The
arbitrator therefore sensibly concluded that the pools
had not been calculated “on the basis of . . . actuarial
assumptions . . . which, in combination, offer the actu-
ary’s best estimate of anticipated experience under
the plan” in years when the Funding Rate was used
in lieu of a lower Segal Blended Rate.
There is no evidence either that the offer of a choice
was made for any reason other than Segal’s anxiety
about having calculated two interest rates or that it
22 No. 11-3034
was accepted for any reason other than the trustees’
desire to attract employers to the fund by manipulating
withdrawal liability. Hence there is no basis for the
plan’s invocation of Combs v. Classic Coal Corp., 931 F.2d
96 (D.C. Cir. 1991), which reversed an arbitrator’s rejec-
tion of a withdrawal-liability calculation because he
had considered only the reasonableness of the interest
rate, ignoring the plan’s argument that its calculation of
the withdrawal liability was still “reasonable . . . in the
aggregate,” 29 U.S.C. § 1393(a)(1), because of offsetting
actuarial assumptions. Nothing in the present case
offsets the malign consequences of the trustees’ directing
Segal to use the Funding Rate instead of the Segal
Blended Rate, when the latter was the actuary’s best
estimate of the rate to use.
The plan cites 29 U.S.C. § 1393(b)(1), which states
that “the plan actuary may rely [in calculating
withdrawal liability] on the most recent complete
actuarial valuation used for purposes of” 26 U.S.C. § 412,
the section of the tax code governing calculation of a
pension plan’s minimum funding requirements—a cal-
culation based on the Funding Rate. The plan argues
that the provision creates a safe harbor, insulating its
use of the Funding Rate for calculation of withdrawal
liability from challenge. But the provision we quoted
does not override the statutory requirements that the
calculation of withdrawal liability be based on rea-
sonable actuarial assumptions and the plan actuary’s
best estimate. Masters, Mates & Pilots Pension Plan v.
USX Corp., 900 F.2d 727, 731-32 (4th Cir. 1990); see
Goldowitz & Landy, supra, at 1294. The Funding Rate
No. 11-3034 23
could be appropriate for use in calculating withdrawal
liability, but was not in the circumstances of this case.
Moreover, the plan’s resolution directing Segal to
switch from one method of estimating the interest rate
to another and back again compounded the damage to
CPC, and also violated the “best estimate” requirement,
which exists to maintain the actuary’s independence. Cf.
Citrus Valley Estates, Inc. v. Commissioner, supra, 49 F.3d
at 1414; Rhoades, McKee & Boer v. United States, supra, 43
F.3d at 1075; Wachtell, Lipton, Rosen & Katz v. Commissioner,
supra, 26 F.3d at 296. The fact that Segal proposed the
switch from the Segal Blended Rate didn’t mean that
the Funding Rate had become its best estimate; Segal
was explicit that it was not its best estimate. It was a
result either of its having been confused by the Supreme
Court’s decision in the Concrete Pipe case or of pressure
from the pension plan.
Finally, the plan argues that its calculation of with-
drawal liability is shielded by the limited scope of the
arbitrator’s review of determinations by a plan’s trustees.
But the trustees were not entitled to disregard a
statutory directive, specifically the directive in section
1393(a)(1) that they base their estimate of withdrawal
liability on the actuary’s “best estimate” of future fund
performance. An actuarial determination that violates
ERISA by not being based on the actuary’s best estimate
is unreasonable, hence reversible by the arbitrator.
29 U.S.C. § 1401(a)(3)(B)(i); Concrete Pipe & Products of
California, Inc. v. Construction Laborers Pension Trust, supra,
508 U.S. at 634-36.
24 No. 11-3034
The district court’s judgment upholding the arbitrator’s
decision is
A FFIRMED.
8-20-12